2008 Business Year-end Tax Planning

Disregarded entities (generally LLC's that are taxed as sole proprietorships or LLC's wholly owned by a corporation or partnership) are treated as if they have no separate existence but are rather a part of their owners for tax purposes. For this reason they use their owners identification number and report their activities on their owners returns. Effective January 1, 2009, their is a major change. For payroll purposes only, they will now need their own separate identification number and will report all payroll taxes as if they were a separate entity. This means that all LLC's that are disregarded entities must obtain a new identification number for payroll purposes only and register as a separate payroll taxpayers with the IRS, state withholding agencies, state unemployment agencies, workers compensation, and city withholding agencies NOW! These LLC's will still report their income taxes as part of their owners with their owners identification numbers. This is sure to cause much confusion with both the LLC's and the taxing agencies as they attempt to match the payroll returns with the income tax returns.

New assets with a MACRS life of 20 years or less purchased and placed in service during 2008 are subject to a new 50% bonus depreciation deduction in addition to the regular depreciation deduction on the balance. This is not limited to the income of the business like the Section 179 deduction is. Property is placed in service when it is ready and available for its intended use. Property is purchased or acquired when it is in your personal control or possession. Eligible new property includes service station buildings, depreciable land improvements (parking lots, lighting, sewers, etc.) farm buildings, and qualified leasehold improvement property. A qualified leasehold improvement property is any improvement to the interior of a non-residential real property that is more than 3 years old subject to a lease. The interior of the building must be occupied exclusively by the lessee. Enlargement of the building, elevators and escalators, structural components of the common area and structural interior framework of the building are not qualified leasehold improvements. For property with a 10 year life or more and transportation property, the placed in service date is extended to 2009. For used property the 2008 Section 179 deduction is increased to $250,000. This deduction is limited to the profit of the business and cannot create a loss.

The deduction for business mileage was $0.505 for the first half of 2008 and $0.585 for the second half of the year. Be sure to calculate your mileage for each half of the year to calculate the correct deduction. For 2009 the deduction for business mileage will be $0.55. IMPORTANT! REMEMBER: NO BUSINESS MILEAGE LOG = NO BUSINESS MILEAGE DEDUCTION. KEEP ACCURATE RECORDS!

The deduction for medical miles or moving was $0.19 for the first half of the 2008 and $0.27 for the last half of 2008. For 2009 the deduction is $0.24.

The deduction for charitable miles was $0.14 for all of 2008 and is the same for 2009.

If you have any questions about these changes, contact our office.

2008 Individual Year-end Tax Planning

Congress has enacted many changes to the Internal Revenue Code this year that affect individuals. A one year patch has been added to the Alternate Minimum Tax for 2008. This years exemption is $69,950 for married taxpayers who file a joint return, $42,600 for single taxpayers, and $34,975 for married taxpayers who file separate returns. Also, AMT relief in the form of a current year credit for AMT taxes paid in prior years due to cashing stock options is now available.

Non-itemizers can take for 2008 and 2009 an additional standard deduction for real estate taxes paid up to $500 for single returns and $1,000 for joint returns.

The deduction for sales tax instead of state and local income taxes has been extended to 2008 and 2009.

The above the line deduction for educator expenses has been extended to 2008 and 2009.

Contributions to charities from and IRA has been extended for another two years.

The credit for energy saving improvements to the principal residence has been extended until 2010. However, the credit expired 12-31-07 and was extended starting 1-1-09. Therefore, there is no credit for 2008. Solar, wind, and geothermal energy expenditures have been included in qualified improvements.

First-time home buyers (who did not own a home in the last 3 years) may take a refundable credit of 10% of the purchase price to a maximum of $7,500 ($3,750 for a taxpayer filing married filing separately). Starting two years later you begin to repay the credit over a 15 year period. The amount that must be repaid is limited to the profit on the sale of the home if it is sold during the 15 year period. If the property is held for more than 15 years the entire amount of the credit will be repaid. In the mean time you have a tax free loan that you can use as you desire. If you use it to reduce your mortgage balance, you will effectively save the mortgage rate compounded for 15 years.

Sales of vacation homes after 12-31-08 will not receive the entire exclusion available to the sale of your personal residence. A planning note, to insure that you receive the exclusion when you buy a new home while selling your old, be sure to buy the new home after you sell the old home.

The Mortgage Forgiveness Debt Relief Act of 2007 provides that a qualified taxpayer does not need to pay federal income taxes on up to $2,000,000 of debt forgiven on a qualified loan that is secured by a qualified principal residence. This change affects debts forgiven between January 1, 2007 and December 31, 2009. This will prevent the tax disaster of owing taxes on the mortgage forgiven even though the taxpayer suffered a financial loss of the home. Their are many complicated rules that go with this provision. See us to discuss your particular case.

Now that the November election is over and we have a new president and congress, expect many changes to happen in the near future. The new president and congress have stated the the "Bush Tax Cuts" will either be repealed soon or will be allowed to expire at the end of 2010. Either way look for many changes and tax increases.